Mentor’s comment

• The question is analytical in nature.
• In the intro, state the changes that were made in the economy i.e. change in the government’s role from driving force of the growth to the facilitator of the growth.
• In the body, elaborate the three pillars of Public Expenditure Management –
  • Aggregate fiscal discipline (Fiscal deficit, CAD),
  • Allocative efficiency (fund allocation between different priority sectors), and
  • Operational efficiency (to reduce leakages).
• The answer needs to give primacy to the first aspect by explaining the Fiscal Responsibility and Budget Management Act, FRBM Act. (To institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence.)
• Mention also the challenges faced by the government, like-low tax base, populist measures, global events, and corruption.
• Conclude by a brief mention of N.K.Singh panel recommendations – Fiscal Council, range of Fiscal Deficit and debt-to-GDP ratio, etc.

Answer:

The public expenditure management (PEM)is an instrument of state policy and mechanism for good governance. The broad objective of PEM is the achievement of overall fiscal discipline, strategic allocation of resources, operational efficiency and macro-economic stability.

Various challenges faced by the government with regard to PEM post-liberalisation

• Global Uncertainty: of the kind witnessed in 2008(subprime crisis) compelled govt to pump more money, overlooking fiscal considerations. Similarly, the current global economic slowdown, US-China Trade war, rising protectionism, US-Iran issue, and resultant crude oil price volatility are all creating issues for fiscal policy.

• Populism: the 2009 election was a classic example where the ruling party won an election in the promise of subsidies and farm loan waivers. All these were not accounted for in the interim budget, leading to fiscal uncertainty. Similarly, farm loan waivers, PM Kisan, etc also create a fiscal burden.
• Unchecked subsidies especially in the agriculture and fertilizer sector, drag govt resources and make fiscal management a difficult task.
• Narrow tax net: More reliance on indirect tax makes the taxation policy more regressive. It also constrains the government to increase its social spending, which is low in India as compared to other major global economies.
• Managing public debt: It is essential to ensure that the burden of the current generation’s needs doesn’t fall on the next generation.
• Containing inflation: It is one of the most important objectives of monetary policy which is also impacted by the revenue and expenditure policies of the government. Falling GST revenues and loss-making PSUs like Air India further strain government finances.
• Estimates of revenue and expenditure: In order to have effective PEM, comprehensive and realistic estimates of revenue and expenditure are essential. Currently, there is uncertainty in providing correct budget estimates.

Government measures for effective Public Expenditure Management

• FRBM (Amendment) Act: Government has targeted to reduce the fiscal deficit gradually and stabilize it by 2023 to 2.5%.
• Monetary policy framework: Inflation targeting by the Monetary Policy Committee has helped in price stability, which is key to effective PEM.
• Deepening of Fiscal Federalism: More tax revenue has been devolved to states from the divisible tax pool. It would help in better allocation of scarce resources based on the needs of states.
• Removing Plan/Non-plan distinction: Removing plan/non-plan distinction and instead adopting the revenue-capital classification of public expenditure will help in the allocation of more resources for the creation of capital assets which in turn will help in improving the efficiency of the economy.
• Public Financial Management System (PFMS): It has been developed at the central level to enable the outcome budgeting. Also, it enables the timely assessment of resource utilization.

Thus prudent management, by rationalizing subsidies, sticking to a fiscal path, and strategic divestment, as suggested by the expenditure management commission(Bimal Japan committee) can go a long way in reforming public expenditure management.